2015: China’s year of diplomatic highs and domestic lows

This has been a complex year for China and its government – a mix of “sweet and sour”. The sweetness came mainly in the external (foreign policy) domain, while the sourness was more evident internally.

Rarely, if ever, has China had a more active year in diplomacy. President Xi Jinping (習近平) was seemingly everywhere, and his multiple state visits met with marked successes. China’s “First Lady”, Peng Liyuan (彭麗媛), accompanied her husband on most visits and left her own very positive impression in many countries. Together, Xi and Peng are very effective emissaries of their nation around the world and they deserve credit for their personal diplomacy.

Xi and Peng’s European diplomacy was highlighted by their regal trip to the UK in October. The British extended the “highest honours” throughout the four-day state visit – from Buckingham Palace, the Houses of Parliament, the Guildhall, a 103-gun salute and a ride down The Mall in Queen Elizabeth’s jewel-studded diamond jubilee coach, and other accolades – a degree of pomp and circumstance that Downing Street has accorded few foreign dignitaries in the past. As it unfolded, the government of David Cameron gratuitously proclaimed that the UK was “China’s best partner in the West” and a “golden era” in British-China relations had opened. The visit netted business deals worth £30 billion (HK$345 billion) and seemed to put the fluctuant relationship on more solid footing, although domestic commentary criticised the British government’s fawning throughout the visit.

In Asia during the year, Xi visited Pakistan, the Philippines, Vietnam and Singapore. In Islamabad, he promised US$46 billion in investment, much of which is earmarked for the China-Pakistan Economic Corridor – part of Xi’s signature “One Belt, One Road” Eurasian infrastructure initiative. In Hanoi and Manilla, Xi tried to put the best face on two of China’s most strained regional relationships. In Singapore, he not only touted the strong bilateral ties, but also surprised the world with his historic meeting with Taiwan’s leader Ma Ying-jeou.

Earlier this month, Xi made his second trip to Africa since becoming China’s leader, stopping in Zimbabwe to meet pariah president Robert Mugabe, before proceeding to South Africa for the Forum on China-Africa Cooperation where he pledged a whopping US$60 billion in development projects across the continent over the next three years.

Perhaps the most significant of Xi’s many sojourns abroad was to the US in October. It was significant not so much because of what it accomplished – but because it is the world’s single most important relationship. Prior to the Washington summit, it appeared to many observers, including this one, that bubbling competition between the two powers was poised to erupt into outright confrontation. The Xi-Obama discussions, however, managed to assuage rising tensions, establish new guidelines on sensitive issues like cyber hacking, and took place in a generally cooperative atmosphere. In so doing, the two sides stepped back from the brink and bought time and space for further amelioration of tensions in 2016. Nevertheless, deep mistrust and substantive problems remain.

Clearly, the Chinese government and Xi personally have invested significant efforts in foreign policy. Including 2014, I cannot recall a two-year period when Beijing has been more active on the diplomatic stage worldwide. During this time, according to the Ministry of Foreign Affairs, Xi has visited no fewer than 36 nations during his brief 33 months in office.

China’s diplomatic offensive is more than bilateral – it extends to many multilateral forums as well. Perhaps the most noteworthy accomplishment during 2015 was the inauguration of the Beijing-sponsored Asian Infrastructure Investment Bank. China also played a constructive role in the recent Paris climate change conference where 195 nations reached a bold new accord to cap global greenhouse gas emissions – a great improvement over Beijing’s blocking behaviour at the 2010 Copenhagen summit.

Xi also gave a well-received speech to the UN during its 70th anniversary session, and participated in the East Asia Summit, G20, and other multilateral meetings during the year. Finally, the International Monetary Fund’s recent decision to include the renminbi as a global reserve currency was another significant event and further indicator of China’s rising status as a world power.

If there was a black mark on China’s foreign relations during the past year, it was Beijing’s artificial island building in the South China Sea and its continued obstinate position claiming sovereignty over the disputed littoral region. Despite widespread regional and international demands to stop, China has continued its dredging and construction activities – which include military runways and facilities – in the Paracel and Spratly island chains. Moreover, Beijing has refused to comply with the Permanent Court of Arbitration in The Hague as it considers the case brought by the Philippines that contests China’s claimed sovereignty. Whatever the ultimate outcome, Beijing’s behaviour has been very costly in terms of its regional and international image.

Beijing’s massive military parade on September 3, ostensibly to commemorate the end of the second world war, was another instance in which China seemingly miscalculated in terms of the image it projects abroad. Contradicting its protestations of peaceful intentions, the military muscle on display in Tiananmen Square sent the opposite message to its neighbours and the world. Despite a full-scale diplomatic offensive to get other heads of state to attend the parade, the only noteworthy leaders who did so were Russia’s Vladimir Putin and South Korea’s Park Geun-hye.

If China’s year abroad was generally positive, its year at home was much less so. A combination of nagging economic, social and political problems plagued the regime and kept it from moving forward on a reformist path.

China’s economy was buffeted by relatively bad news throughout the year. The few bright spots – like strong consumer spending, expansion of services, the growth of tertiary industries and stabilisation of the property market – were more than offset by the growing list of negatives afflicting the national macro economy, some regional economies and specific sectors.

Overall GDP growth numbers fell from 7.3 per cent in 2014 to 7 per cent in the first half of 2015, which the government proclaimed to be the “new normal”, only to revise the target downward further to 6.5 per cent in November. Many economists judge the real figure could be a full 1-3 percentage points less. Some regions, like the northeast and northwest, are growing at a substantially lower rate. Meanwhile, export industries along the southeastern seaboard are laying off workers, shutting down factories and trying to reduce excess capacity. Real industrial growth has fallen to about 5 per cent while nominal industrial growth has been virtually flat since the summer. Other measures like electricity usage and freight carried are similarly down, indicating real contraction in the national economy.

The government’s response? More liquidity, fiscal stimulus and fixed asset investment. The result? Further ballooning of the total national debt load – now estimated at nearly 300 per cent of gross domestic product – and postponing of much-needed structural reforms. Of this haemorrhaging debt, almost 70 per cent is on corporate accounts, with the remainder on the books of local governments. The government’s addiction to fiscal stimulus and continued infrastructure investment is necessitated by the need to maintain near-full employment, its protection of state enterprises from competition, and the structural distortions resulting from the political imperative of maintaining the Communist Party in absolute power.

Perhaps the year’s major economic debacle came during the summer when China’s stock market plummeted, dropping 30 per cent and wiping out US$5 trillion in capitalised value in two weeks. In response to the free fall, the government directly intervened by temporarily halting trading, freezing new IPOs, and loaning US$42 billion to firms to buy up shares in an attempt to stabilise stock prices and the market. A few weeks later, Beijing shook global markets again by announcing an abrupt 4 per cent depreciation in the value of the renminbi. On the heels of this action, on August 24, the Shanghai stock market tanked again, falling a further 7.6 per cent in one day and bringing additional losses of several trillion dollars.

The summer stock market fiasco was to some extent of the government’s own making. It was an artificially created bubble waiting to burst. Chinese officials openly encouraged the rise in share prices in 2014-2015, as real estate prices began their own decline from an exaggerated peak. Chinese officialdom’s creation of the initial bubble and subsequent handling of the crisis raised serious questions from foreign observers about the competence and credibility of economic policymaking.

Despite this economic volatility, few economists are predicting a hard landing for the economy in 2016. Indeed, several point to sound fundamentals in the overall economy. Yet others are more sceptical and argue that China is in for a protracted period of relative stagnation, more volatility, unfulfilled reforms and an incomplete transition to a mature developed economy. Getting China’s financial system in order (which requires a top-to-bottom overhaul), eliminating industrial inefficiencies and shrinking the state sector, stemming capital outflows and encouraging innovation are all crucial ingredients if China’s economy is to move forward qualitatively in 2016.

Socially, China continued to confront gnawing problems throughout the year. Environmental problems worsened, with air pollution reaching epidemic (red alert) levels in some cities recently. Income inequality continued to be severe (among the highest in the world), while China’s wealthy continued to leave the country and increasingly park their assets abroad. Incidents of mass social unrest (defined as incidents involving more than 100 participants) continued to escalate – the number in 2015 may eclipse the estimated 180,000 in 2014.

Tibet (西藏) and Xinjiang (新疆) remain particularly volatile, with terrorist incidents now becoming a more frequent threat to Chinese society. Last month, paramilitary security forces killed 28 suspected terrorists who they claimed were responsible for a September incident that took the lives of at least 16 in Aksu (阿克蘇), Xinjiang. After the operation, officials claimed the “violent terrorist gang were directly under the command of a foreign extremist group”. It is known that several dozen Uygurs have migrated to Syria to fight with Islamic State, where the group executed its first Chinese hostage in November. Three other Chinese citizens perished in the Mali hotel siege in the same month. In reaction to these horrific events, as well as the Paris massacre, Xi pledged China’s solidarity in the fight against global terrorism, although Beijing has yet to join the military coalition fighting Islamic State.

China also continued to wrestle with its widespread corruption problem during the year, with the party’s zealous campaign showing no signs of abatement. Several more major “tigers” were taken down: former internal security tsar and Politburo member Zhou Yongkang 周永康); former Central Military Commission vice-chairman and Politburo member Guo Boxiong (郭伯雄); and former Central Committee General Office director and Politburo Secretariat secretary Ling Jihua (令計劃). Rumours continue to circulate about several other former Politburo-level officials being in the sights of the Central Commission for Discipline Inspection.

The anti-corruption campaign has thus far netted more than 200,000 officials at various levels since 2012, including more than 4,000 military officers and 82 generals. During the past year, financial securities brokerages, banks and regulatory bodies were targeted along with energy sector executives. The campaign is due to continue and deepen in the new year. The commission recently announced it will conduct “across-the-board” inspections into 280 ministries, local governments, state-owned enterprises and financial institutions.

While having a cleansing effect, the campaign has also had the ancillary impact of a purge – spreading fear throughout the 45 million-member cadre corps and 88 million party membership. Everyone is fearful and frightened that the knock on their door could come at any time. As one long-time party member confessed to me in Beijing in November: “There is widespread fear and a complete lack of trust among party members today. Nobody trusts anybody. It is like the Cultural Revolution again.” As a result, the entire party-state system is frozen – and it is having a deleterious effect on both economic performance as well as the ethos within ruling institutions, even if the campaign remains highly popular with the public. Thus, ironically, a campaign meant to clean up and strengthen the party may be further weakening it.

This corrosion within the elite was parallelled with deepening repression against several sectors of society during the past year. There has been an unremitting crackdown on all forms of dissent; the internet and social media have been subjected to much tighter controls; Christian crosses and churches have been demolished; Uygurs and Tibetans have been subject to ever greater surveillance and persecution; dozens of “rights lawyers” have been detained and put on trial (including Pu Zhiqiang recently); public gatherings are forbidden; a wide range of publications are censored; government and media attacks on “foreign hostile forces” occur with regularity; Western textbooks have been officially banned from university classrooms; intellectuals are under tight scrutiny; foreign and domestic non-governmental organisations have been subjected to harsh governmental regulatory pressures; and the “stability maintenance” security services have blanketed the country.

The Committee to Protect Journalists, an international advocacy group based in New York, announced last week that, for the second year in a row, China leads the world in the number of incarcerated journalists (nearly a quarter of the over 200 held worldwide). A swathe of draconian new regulations and laws concerning national security, cybersecurity, terrorism and NGOs were drafted or enacted during the year. All in all, China during 2015 was more repressive than at any time since 1989-1992, following the Tiananmen Square incident.

Taken together, these domestic negativities are a distinct contrast to the generally positive accomplishments of China’s foreign policy during 2015. It is also an odd juxtaposition, as one would assume that an insecure regime at home would act the same way abroad – yet we see China acting with greater assurance on the world stage at the same time it cracks down domestically. Hopefully, the maturity Beijing is displaying abroad will translate into greater confidence and tolerance at home during 2016. But don’t bet on it.

This piece originally appeared in South China Morning Post